2.2 Aggregate Demand

• Aggregate Demand


  Total household expenditure on goods and services in an economy AD = C+I+G+(X-M)
• Animal Spirits


  Confidence or pessimism held by consumers and firms.
• Consumer Confidence


  Expectations about the future including interest rates, incomes and jobs.
• Consumer Durables


  Products that are not used up immediately when consumed and provide a flow of services over time eg washing machine
• Consumer Spending/ Consumption


  Household spending on goods and services. Consumption is 60% of the UK's AD
• Disposable Income

  Gross income less income tax and national insurance contributions plus welfare benefits. DY = Gross income - direct taxes
• Household Income

  The financial resources available to household to spend or save
• Original Income

  Income from jobs, private pensions, interest from savings
• Gross Income


  Original income + cash benefits
• Post-tax Income

  Disposable income - indirect taxes
• Household Wealth


  The monetary value of assets –including property, shares, savings, pension fund assets
• Income


  A flow of money to factors of production
• Interest Rate


  The cost of borrowing or the reward for saving expressed as a percentage
• Negative Equity


  When the value of an asset falls below the debt left to pay on that asset.
• Pension Fund


  Employees' pension benefits are invested in stocks, bonds and other assets to boost returns and ensure there are sufficient funds to retire
• Personal Allowance


  The amount of income you can earn before you start paying income tax.
• Precautionary Saving


  Saving due to fears of a loss of real income or rising unemployment.
• Saving Ratio


  The percentage of household disposable income that is saved rather than spent
• Unsecured Credit


  Credit not secured by another asset ie. credit cards
• Wealth

  Assets that generate income eg. savings held in commercial bank deposits, ownership of shares issued by PLCs and equity stakes in LTDs and real estate.
• Wealth Effect


  The supposed link between changes in wealth and household spending.
• Access to Credit


  The willingness and ability of financial institutions to lend funds to producers and consumers.
• Business Confidence


  Expectations about the future of the economy which influences firms' spending on capital
• Gross Investment

  Total investment = new investment + replacement investment.
• Investment

  Spending on capital goods
• Investment Income


  Interest, profits and dividends from assets owned and located overseas.
• Keynesian Economics


  The belief that the state can directly stimulate demand in a stagnating economy by funding public works, housing, schools, hospitals etc.
• Net Investment

  Total investment - replacement investment.
• Replacement Investment


  The purchase of capital goods by firms to replace existing, worn-out capital. It does not add to the total capital stock of an economy.
• Fiscal Policy


  Government policies regarding tax can be loose (lower taxes and increased spending) or tight (higher taxes and decreased spending)
• Government Borrowing


  The amount the government must borrow each year to finance their spending.
• Government Debt


  The total stock of unpaid debt issued by a government borrowed by issuing bonds or other securities.
• Government Spending


  Spending by government on education, health care and defence & other public services.
• Trade Cycle


  Fluctuations in economic activities especially in employment, output and income, prices, profits etc
• Automatic Stabilisers


  Automatic fiscal changes as the economy moves through the business cycle
• Discretionary Fiscal Policy


  The government actively making a change to spending or taxes to achieve macroeconomic objectives
• Determinants of Investment


  Interest rates, business confidence, profitability, productivity of capital, government policies, economic growth (Accelerator Effect)
• Determinants of Consumption


  -Income

  -Inflation

  -Interest rates

  -Wealth effect

  -Consumer confidence

  -Demographics
• Life-cycle Hypothesis


  At different stages of a person's lifetime their consumption changes

  A) Savings

  B) Income Curve